w0 PS 9A,0l
POLICY RESEARCH WORKING PAPER 2900
Economic Structure, Productivity,
and Infrastructure Quality
in Southern Mexico
Uwe Deichmann
Marianne Fay
Jun Koo
Somik V. Lall
The World Bank
Development Research Group
Infrastructure and Environment
and
Latin America and the Caribbean Region
Finance, Private Sector, and Infrastructure Unit
October 2002
I POLICY RESEARCH WORKING PAPER 2900
Abstract
There are large and sustained differences in the economic of the country, with the economic landscape dominated
performance of sub-national regions in most countries. by micro enterprises and a relative specialization in low
Deichmann, Fay, Koo, and Lall examine the economic productivity activities. This, coupled with low skill levels
structure and productivity in Southern Mexico and and fewer skill upgrading opportunities, reduces the
compare it with the rest of the country. The authors use performance of Southern firms. Productivity differentials
firm level data from Mexican manufacturing to test the between Southern firms and others, however, only exist
relative importance of firm level characteristics (such as for micro enterprises. The econometric analysis shows
human capital and technology adoption) compared with that while employee training and technology adoption
external characteristics (such as infrastructure quality and enhance productivity, access to markets by improving
regulatory environment) in explaining productivity transport infrastructure that link urban areas also have
differentials. important productivity effects.
The authors find that the economic structure of
Southern Mexico is considerably different from the rest
This paper-a joint product of Infrastructure and Environment, Development Research Group, and the Finance, Private
Sector, and Infrastructure Unit, Latin America and the Caribbean Region-is part of a larger effort in the Bank to understand
the role of economic geography and urbanization in the development process. Copies of the paper are available free from
the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Yasmin D'Souza, room MC2-622, telephone
202-473-1449, fax 202-522-3230, email address ydsouza@worldbank.org. Policy Research Working Papers are also
posted on the Web at http://econ.worldbank.org. The authors may be contacted at udeichmann@worldbank.org,
mfay@worldbank.org, or slalll@worldbank.org. October 2002. (29 pages)
The Policy Research Working Paper Seoes disseminates the findings of work in progress to encourage the excaange of ideas about
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Produced by the Research Advisory Staff
Economic Structure, Productivity, and Infrastructure Quality
in Southern Mexico'
Uwe Deichmann
Marianne Fay
Jun Koo
Somik V. Lall
The World Bank, Washington DC 20433
'We would like to thank Jose Luis Guasch for comnments and suggestions and Julio Gonzalez for assistance in
getting access to the firm level ENESTYC data. We appreciate the cooperation and collaboration of the
Mexican National Institute of Statistics, Geography and Informatics (INEGI) throughout the process. This
paper is part of a larger program to examine the contribution of econornic geography and investment climate to
econormic efficiency. The findings reported in this paper are those of the authors alone, and should not be
attributed to the World Bank, its executive directors, or the countries they represent. Correspondence
pertaining to this paper should be addressed to Sonik V. Lall (slal] 1 @worldbank.org), 1818 H Street NW,
Washington, DC 20433. Fax: 202 522 3230.
Economic Structure, Productivity, and Infrastructure Quality
in Southern Mexico
1. Introduction
The effects of external factors on the performance of the manufacturing sector are of
major interest to policy makers concerned with facilitating economic activities in all regions
of a country. How should publicly provided social and physical investment be targeted to
yield the highest return as measured in increased productivity and employment? And what
factors are critical in helping lagging regions catch up with more dynamic areas of the
country? The intellectual underpinnings of these investigations are found in the 'New
"Growth Theory' and 'New Economic Geography' literature with an emphasis on increasing
returns, externalities and imperfect competition. New Growth Theory proponents such as
Romer (1986; 1990 a, b) and Lucas (1988) stress the role of technology adoption, rents from
innovation, human capital, and government policy in influencing the performance of firms.
The public sector can provide or enhance some of these enabling factors. The point of
departure from neo classical models (Solow 1956, Swan 1956) is therefore that public policy
matters - publicly provided skills training or education programs and public investment in
technology development and innovation, among other things, enhance economic
performance and can help reduce imbalances in regional economic performance.
Complementing these non-spatial growth theories, models in the 'New Economic
Geography' literature (Krugman 1991) emphasize the importance of transport costs and
therefore location in the spatial concentration of economic activity. This leads the way to
examining the potential benefits of transport infrastructure by connecting remote regions to
major urban areas, and thereby offsetting some of the inherent disadvantages of remote
location (see Henderson et al. 2001).
There are large and sustained differences in the economic performance of sub
national regions in most countries. Well documented examples of 'lagging regions' in
2
industrialized countries where productivity and incomes are unusually low by national
standards are the Applachian states in the.United States and the Southern part of Italy.
Similar situations of low incomes and productivity exist in developing countries. Examples
are the rural areas of the Southwest and the Northwest of China, outer islands of Indonesia,
parts of Northeastern India, Northwestern and Southern parts of Bangladesh, much of
northern Nigeria, the rural Savannah of Ghana, northeast Malaysia, and the northeast of
Brazil (Ravallion 1998). Differentials in regional economic performance in developing
countries tend to be more severe due to much lower investment overall and a concentration
of investment in one or a few growth centers. Lagging regions in countries such as China or
Brazil are not just characterized by lower relative incomes and standards of living, but may
in fact be home to significant poverty. The local population may be stuck in so-called spatial
poverty traps, in which poor infrastructure and resource endowments lead to limited access
to educational, social and economic opportunities (Jalan and Ravallion 1997). Out-migration
alone is unlikely to solve this problem. Governments therefore need to consider public
investment in those areas to stimulate private sector growth and increase productivity and
employment.
While there has been considerable work on identifying proximate sources of firm
level productivity (see Tybout 1998), there is limited empirical evidence on why firms in
some regions prosper and on which location based amenities have the largest impact on firm
level productivity. Some of the reasons are methodological. Due to the idiosyncratic
evolution of agglomeration and dispersion factors, it is more complicated to develop general
explanations concerniing spatial variations in productivity than to explain general factors
contributing to productivity differentials. The benefits of agglomeration economies from
scale, density and scope advantages lead to spatial concentration of economic activity and
productivity, whereas high friction costs from poor transport connectivity would lead to
dispersion (Button and Pentecost 1999). Other reasons for the paucity of studies of regional
differences in firn productivity are empirical. Micro-level firm data at a sufficiently
disaggregated level of sectoral and spatial aggregation are rarely available, especially in
3
developing countries. Furthermore, new tools for modeling spatial and locational parameters
explicitly have only recently been adopted in economic research.
In this paper we examine the determinants of firm level productivity in Mexican
industry and their relation to differentials in economic performance in the Southem states of
Mexico in comparison with the rest of the country. 2 We are particularly interested in
examining the following questions:
1. Are there significant productivity differences between firms in the South and
other firms?
2. Is the industrial structure of the lagging South considerably different from the
rest of the country?
3. Do factors beyond the internal production process influence productivity?
4. In particular, do the availability of reliable transport infrastructure and the state
level regulatory environment influence productivity?
The rest of the paper is organized as follows. In Section 2, we provide an overview
on productivity distribution and firm level characteristics in Mexican manufacturing
establishments. In Section 3 we discuss the determinants of productivity including the role
of infrastructure and business regulation. The econometric specification and results are
presented in Section 4 and 5 respectively. Section 6 concludes.
2. Productivity differentials in Mexican industry
We use data from the National Survey of Employment, Salaries, Technology, and
Training (ENESTYC) to examine productivity differentials across manufacturing
establishments in Mexico. This survey program is implemented by the National Institute for
Statistics, Geography and Informatics (INEGI). ENESTYC is designed to provide rich
information on employment, worker characteristics, training, and use of technology in
2The eight Southern states are: Campeche, Chiapas, Guerrero, Oaxaca, Quintana Roo, Tabasco, Veracruz and
Yucatan.
4
Mexico's manufacturing firms. Firms in the ENESTYC can be identified at the level of the
country's 3000 municipios, which allows us to conduct spatially disaggregated analysis of
transport infrastructure and plant level productivity. The ENESTYC surveys have been
conducted in 1992, 1995, and 1999. However, each survey uses a different sampling frame
and methodology, which prevents us from creating a panel of firms for analysis. We use the
1999 data which includes data from 7,429 plants. Firms in the ENESTYC are grouped into
four size categories: micro (1-15 workers), small (16-100), medium (101-250), and large
(more than 250). A major advantage of using the ENESTYC database is that it is
representative across firm size and industry sectors. For the analysis, we supplement
ENESTYC firm level data with detailed information on the availability and quality of
infrastructure (INEGI 2000), as well as municipio level estimates of GDP per capita
(CONAPO 2000).
Average labor productivity in the South, measured as output per worker, is about
53% of the national average. Plant level productivity is nationally estimated to be 254,300
Pesos per worker in 1999 compared to 134,300 Pesos per worker in the Southern states
(Table 1). Figure 1 shows a comparative distribution of productivity for Southern firms and
those located in other regions. We see that firms in the South have a somewhat bimodal
distribution with a lower mean value and larger productivity dispersion than firms in other
states. Productivity levels in other regions are largely normally distributed.
Table 1: Firm size and productivity
Southem Region Other Regions Nation
Avg. Share of Avg. Avg.
No. of Share of productivity No. of Firms productivity No. of Share of productivity
Size Firms Firms (%) ('000 peso) Firms (%) ('000 peso) Firms Firms (%) ('000 peso)
Micro 386 55.1 25.9 1525 22.7 191.1 1911 25.7 157.7
Small 82 11.7 367.5 1129 16.8 352.4 1211 16.3 353.4
Medium 112 16.0 222.7 1882 28.0 281.6 1994 26.8 278.3
Large 121 17.3 240.1 2192 32.6 263.0 2313 31.1 261.8
Total 701 100.0 134.3 6728 100.0 266.88 7429 100.0 254.3
Source: ETNESTYC (INEGI 1999)
5
There is considerable heterogeneity in productivity across firm size. Average
productivity in micro size firms is 157,700 Pesos/worker compared to 353,400 Pesos/worker
for small firms, 278,300 Pesos/worker for medium sized firns, and 261,800 Pesos/worker
for large firms. Labor productivity of micro firms is thus only about 55% of non-micro
firms. Figure 2 shows the distribution of productivity for micro and other firms. The
distribution of micro firms is centered to the left of the distribution of other firms. Average
productivity is lower and dispersion is higher for micro firms. Productivity differentials for
micro versus larger firms are even more pronounced in the South, where micro-firms
represent about 55% of all manufacturing activity in the Southern states. This is more than
double the national representation of micro-firms. The dominance of micro firms in the
South reflects a production structure dominated by activities that cannot exploit scale
economies. Micro firms in the Southern states are only 10% as productive as larger firms in
that region. In the rest of the country micro firms achieve 66% of the productivity of larger
firms. Across regions, productivity of micro-firms in the South is only 26,000 Pesos/worker,
which is about 14% of micro-firm productivity in non-Southern locations.
Figure 1: Labor productivity in Southern and other firms3
- Firms in other states -o--- Firms In Southem states
.4-
.3-
.2-
0 5 10 15
Inp
3 The log of productivity is used to show productivity distribution
6
Figure 2: Distribution of labor productivity for micro and other firms
Other firms E Micro firms
.4-
.3
.2-
0 5 l0 15
Inp
In addition to the dominance of micro firms in the South, the economic base of this
region is also considerably different from the rest of the country. Approximately two thirds
of manufacturing units in the South are either in the Food, Beverages and Tobacco or in the
Textiles, Clothing and Leather industries. In contrast, nationwide representation of these two
industry sectors is about 41%. Even with disproportionately high representation in these two
sectors, average labor productivity is considerably lower than national standards. For
example, in the Food, Beverages and Tobacco industries, average nationwide labor
productivity is 399,000 Pesos/worker but is only 266,000 Pesos/worker in the Southern
region. Similarly in the Textiles, Clothing and Leather industries, average nationwide labor
productivity is 101,000 Pesos/worker compared to 16,500 Pesos/worker in the South.
Relatively high value sectors such as Metal products and machinery industries represent
24.4% of the national firm distribution but only account for 7.3% of Southern firms.
3. Determinants of productivity
Firm level characteristics
Two of the most important factors affecting a firm's productivity level are human
capital and the degree to which the company employs improved technologies. In both
7
categories, firms in the Southern states lag behind their peers in the rest of the country.
About 64% of employees in Southem firms are unskilled workers compared to 52% in other
parts of the country. On the job training is also significantly lower in Southern firms (Table
2). Only 41% of firms in the South have employee training programs compared to 70% in
the rest of the country. Technology adoption rates are also quite low - adoption of generic
technologies in the South is 52% compared to 77% in other regions; adoption of automated
equipment is 19.7% compared to 34.3% in non Southern states; and adoption of
computerized numeric control (CNC) machines is 5.6% in the South compared to 10.2% in
other parts of the country.
Table 2: Firm Level Attributes
Technology adoption
Employee training Any Type Automated CNC
equipment
Total no. No. of Share of No. of Share of No. of Share of No. of Share of
of firms firms firms (%) firms firms (%) firms firms (%) firms firms (%)
Southern Region
Micro 386 24 6.2 98 25.4 14 3.6 - 0.0
Small 82 56 68.3 60 73.2 17 20.7 3 3.7
Medium 112 94 83.9 97 86.6 49 43.8 19 17.0
Large 121 112 92.6 109 90.0 58 47.9 17 14.0
All firms 701 286 40.1 364 51.9 138 19.7 39 5.6
Other Regions
Micro 1,525 195 12.8 634 41.6 126 8.3 8 0.5
Small 1,129 767 67.9 888 78.7 332 29.4 67 5.9
Medium 1,882 1,656 88.0 1,647 87.5 777 41.3 249 13.2
Large 2,192 2,096 95.6 2,028 92.5 1,075 49.0 359 16.4
All firms 6728 4714 70.0 5197 77.2 2310 34.3 683 10.1
Nation
Micro 1,911 219 11.5 732 38.3 140 7.3 8 0.4
Small 1,211 823 68.0 948 78.3 349 28.8 70 5.8
Medium 1,994 1,750 87.8 1,744 87.5 826 41.4 268 13.4
Large 2,313 2,208 95.5 2,137 92.4 1,133 49.0 376 16.3
All firms 7429 5000 67.3 5561 74.8 2448 32.9 722 9.7
Source: ENESTYC (INEGI 1999)
Endogenous growth models predict that both foreign capital and foreign investment
are important productivity enhancing factors. Grossman and Helpman (1991) show that
8
foreign trade and investment contributes to economic growth through increased quality
inputs for manufacturing firms, knowledge spillovers from foreign firms to domestic firms,
and competitive pressures from global markets. Coe and Hoffmaister (1995) showed that
trading is an important source of productivity growth in general and particularly for firms in
developing countries as they can embody foreign knowledge from developed countries.
Empirical work by Blomstrom (1986) for Mexican industry shows that the presence of
foreign subsidiaries positively contributes to structural efficiency. Similarly Iscan (1998)
finds that TFP in Mexican manufacturing firms improved in parallel with increasing exports
after NAFTA.
The final destination of finished products varies considerably between firms in the
South and other parts of the country. From the ENESTYC questionnaire we can identify
firms with more than 50% of their sales in foreign markets. Findings from trade models
(Grosman and Helpman 1991, Coe and Helpman 1995) suggest that export oriented firms
are likely to have higher rates of technology adoption and will function close to the domestic
best practice efficiency frontier. As a consequence, productivity should be higher for these
finns. In the ENESTYC sample, 15.4% of all firms have export market orientation. In
comparison, export orientation for Southern firms is about half the national average (8.3%).
Disaggregating by firm size, for the South we find that only 1.2% of micro firms and in
comparison 20.1% of non-micro firms produce mainly for foreign markets. We also look at
the source of investment and find that about 13.6% of all firms in the country have more
than half of their investment from foreign sources. Compared to the nationwide average of
13.6%, only 3.3% of Southern firms have majority foreign investment. Disaggregating by
firm size we find that almost all foreign investment is in non-micro firms.
Transport Infrastructure and Market Access
High quality transport infrastructure creates opportunities for interaction among
firms and customers-regardless whether these customers are other firms or households.
Firms that are located in areas with better infrastructure will be more integrated into the
9
regiqnal, national and global market system. This reduces the cost of obtaining inputs from
suppliers and shipping finished goods to customers. Firms that are located in highly
accessible areas are also more exposed to competition and are thus forced to improve
productivity.
Quantitative information on regional or local market integration is scarce. Summary
statistics such as the total road length in a state/province or straight-line distance to ports or
urban agglomerations are poor proxies for the complexity inherent in a national or regional
transportation network. We therefore use a digital geographic representation of Mexico's
transport network to compute an index of accessibility for each municipio as a simple
measure of accessibility and potential market integration (see Lall et al. 2001). The index
summarizes the size of the potential market that can be reached from a particular point given
the density and quality of the transport network within that region. The definition of the
access measure is conceptually straightforward. For any given point in the country, the
accessibility indicator is the sum of the population of urban centers surrounding that point,
inversely weighted by the travel time required to reach that center. Several small urban
centers in close proximity may thus have a similar contribution to the access measure as a
single larger urban center that is further away. Formally, the access indicator is calculated
as:
Ai =j:Pj*f(di)
where Ai is the accessibility indicator for location i, Pj is the population of cityj, and du is
the distance or travel time between location i and cityj. The function applied to the distance
or travel time measure is selected so that cities further away contribute relatively less to the
overall index. In the classical gravity model that is frequently used in the analysis of trade
flows, this function is the inverse of the squared distance. Alternatively, the negative
exponential decay function that we applied to travel times in our analysis yields a more
gradual diminishing of the influence of urban centers. We computed the access measure
10
using an up-to-date digital map of transportation infrastructure (INEGI 2001).4 For each
road segment, the database indicates the number of lanes and whether it is paved or
unpaved. For railroad lines, the number of tracks is indicated. For each category of road or
rail we determined an estimated average travel speed which allowed us to calculate how
long it will take to traverse each segment in the transport network.5 For urban population, we
use an INEGI database of the location and population size of approximately 700 cities and
agglomerations in Mexico.6 These urban centers account for approximately 68 million of
Mexico's 97 million people in 2000. We computed the accessibility index for a very large
number of points distributed across Mexico. The distance weight is the travel time along the
shortest path in the network from the given point to each urban center. The municipio level
indicator used in our econometric analysis is the average of the accessibility indicator of all
points that fall into that municipio. Figure 3 shows the resulting market access surface for
Mexico.
A limitation of the market access indicators used here is that it only estimates
domestic market access. This indicator does not take into account potential market size
effects across national boundaries. For example, we potentially bias the true market
integration downwards for the northern regions of Mexico because many firms located there
have buyer-supplier linkages with border cities in the United States. A logical extension of
our work would thus be to test the effect of cross-boundary market accessibility on the
productivity of firms near border areas (see Clement et al. 2002).
We calculated a second, related indicator based on a measure of local wealth rather
than population. For firms it matters not only how many people reside within the vicinity of
a given point, but also what their purchasing power is. Since we do not have information on
personal income, we used available data on municipio level GDP. The local market potential
4The digital road and rail network includes 171,000 km of roads, of which 84,000 km are paved roads, 51,000
are unpaved, and 36,000 are paths and breaches. The rail network has an estimated total length of 14,000 km.
These values are GIS calculated from 1: Imillion scale digital maps and may not necessarily match official
statistics.
5 Using travel time on a transport network provides a more accurate measure of accessibility compared to the
computationally much simpler straight-line distance as employed, for example, by Hanson (1998).
6 See http:/Hsedac.ciesin.org/plue.
index is defined as the total GDP that can be accessed through the transport network within
two hours travel time. In this case we do not discount GDP that is located further away, so
the results can be expressed in monetary units. The index is calculated using the Consejo
Nacional de Poblaci6n's (CONAPO) estimates of municipio per capita gross product.
Within each municipio we first computed the total GDP for urban centers based on their
population. We then distributed the residual GDP evenly over all other points in that
municipio.7 The GDP-based market potential index is then the sum of the estimated GDP
that is generated at all points in the network that can be reached within the specified travel
time. The point with the maximum estimated market potential is in Cuauhtemoc municipio
in the Federal District. According to our estimates, a quarter of the total national GDP is
generated within two hours travel time from this point.
Regulation and Investment Climate
The regulatory framework in Mexico is complex and cumbersome despite efforts to improve
it. In an effort to assist these reforms, the Consejo Coordinator Empresarial (CCE), a trade
group has published an annual report since 1998 on the quality of the regulatory framework.
The assessment is based on an analysis of improvement brought to the states' regulatory
framework (examining legal, administrative and institutional instruments in place) and on an
annual survey of entrepreneurs which asks them (i) their views of the quality of the
regulatory framework, and (ii) the number of days requires in their experience to open a
business.
Figure 4 and Figure 5 show state level variations in selected business regulation
indicators from CCE (2001). As the maps show there are no clear difference between the
Southern States and the rest of the country. In fact there are significant variations among the
Southern States and across indicators.
7A necessary simplifying assumption is that urban and rural GDP are identical.
12
4. Econometric Analysis
Specification
We estimate two models to test the impacts of technology adoption, worker training,
infrastructure and business regulations on plant level productivity. The first model is
estimated only with plant-level characteristics and the second model with both plant-level
and plant invariant regional characteristics. The results from separate models facilitate
examination of the relative importance of each attribute with respect to productivity and
make it easier to identify productivity differentials between the Southern states and the rest
of the country.
We use the following two models:
In(Pi) = A + /3ATR, + 32AGEi + 33SWi + ,84FCi + /35LOC, +
Xj= y1jT,j + k=1 AkSZik + E=8 ojID, + £ (1)
ln(Pi) = /fo + /3ATRi + 2AGEi + ,3SWi + ,84FCi + /35LOC, + /l6ACCm (2)
E r T4, + Ek=1 kS4 + Y-8 Iv,INDI + YX= IrRG,, + X, i7rRG,rLOC, + 6i
where P is firm labor productivity measured in Pesos per worker, TR is worker
training, AGE is plant age, SWis the share of skilled workers, FC is a foreign capital dummy
indicating whether foreign investment accounts for more than 50% of total investment, LOC
is a dummy for the Southern states, ACC is the municipio-level market access indicator, TAs
are technology adoption indicators discussed below, SZs are firm size dummies, INDs are
industry dummies, and RGs are measures of state-level business regulations.
Given the large productivity differences between micro and other sized firms, we
decided to perform the analysis in three parts. First, with the entire sample of firms, next
with micro firms, and finally with non micro firms. As micro firms make up more than 50%
of manufacturing activity in the Southern states, a better understanding of factors
influencing these firms will help examine the economic base of this region. We also believe
that the needs of micro firns and larger firms are different. Micro firms are also more likely
13
to be influenced by the local regulatory environment and regional milieu due to their small
size. Due to their small size, most of these firms need to develop good working relationships
with ancillary firrns for business services and other activities which could typically be part
of a larger firm. As a result, the workings of all related firms and links with credit markets
and lenders are important for the survival of micro enterprises.
Predictions from endogenous growth models attribute the sustainable growth of
productivity to the accumulation of human capital and knowledge. Worker training and the
adoption of new technology tend to be productivity-enhancing factors. In our models,
worker training is a dummy variable specifying whether or not a plant provides any kind of
training program for its employees. We consider varying degrees of sophistication in new
technologies by including three technology adoption variables for (a) computerized numeric
control (CNC) machines, (b) automated equipment, and (c) any kinds of general
manufacturing technologies. Following NEGI's definition, we group the sample into four
size categories: micro, small, medium, and large. Eight industry dummy variables are
included to capture industry-specific fixed effects.
In the second model, we introduce state business regulations and transport
infrastructure (the market access indicator). The number of days required to open a business
and a measure of regulatory improvement measure the business regulatory environment for
each state. The latter is the rank of the state according to an index of regulatory
improvement from 1 (state with most improvement) to 32 (state with least improvement). As
noted in Section 3 these data are taken from CCE's study "Calidad del Marco Regulatorio
en Las Entidades Federativas Mexicanas: Estudio Comparativo" done in 1999.
As to the market access measure, its development and introduction in productivity
analysis is perhaps the major innovation of this study. Transportation is a central element of
the so-called new economic geography (Krugman 1991, Fujita et. al. 1999). Availability of
reliable infrastructure reduces transportation costs of inputs and outputs, thereby leading to
productivity enhancements. We also include a Southern states dummy to compare firm level
productivity in the Southern states and the rest of the country. Mexico provides an
14
interesting case study because firms in the Southern states are believed to have much lower
productivity due to the lack of skilled labor and the relatively low levels of technology use.
Under the assumption that the regulatory environments are more important in less-developed
Southern states than others, we also included interaction terms between the Southern states
dummy and business regulation variables.
A problem with the ENESTYC dataset is that data for some variables are missing for
some observations. Many firms do not report their location or production attributes. Missing
observations can introduce bias in the parameter estimates, if the dropped observations are
not completely random. As it turns out with the ENESTYC data, the missing observations
show a clear pattern. Most of the missing data for production value (i.e. firm level output)
are for small firms located in the Southern states. On the other hand most of the missing
location attributes are for medium and large size firms. The easiest and probably the most
frequently used methods to handle the missing data problem is casewise data deletion and
mean substitution. If a case (i.e., a firm) has any missing values, the entire record is deleted
or missing data are substituted by average values. However, Roth (1994) compares various
commonly used approaches in empirical research and concludes that casewise data deletion
and mean substitution are inferior to maximum likelihood based methods such as multiple
imputation (Rubin 1978, 1987, among others). Multiple imputation usually generates five to
ten complete data sets by filling in gaps in existing data with proper raw values. Raw values
are drawn at random from their predicted distribution based on the observed data. Then each
complete data set can be analyzed by common statistical methods such as regression
analysis. After conducting the identical analysis multiple times using different imputed data
sets, results from all regressions are combined into one summary set of parameters.
Advantages of the multiple imputation technique are well-documented. First, it is
robust to violations of the assumption that variables are normally distributed. Second, it
generates complete multiple raw data matrices that can be analyzed by virtually any
statistical package. Third, statistical inferences (standard errors and p-value) are valid
because multiple imputation incorporates uncertainly introduced by missing values. Lastly,
15
in principle, the imputation process does not change any underlying data structure while it
increases the number of observations usable for analysis (Schafer, 1997).
5. Results from Econometric Analysis
We estimated equations (1) and (2) using standard OLS techniques for all firns, only
with micro firms, and with all other firms (excluding micro). Findings are summarized in
Tables 5, 6 and 7. Table 5 provides results for all firns, Table 6 for micro firms and Table 7
for other medium and large size firms. We discuss the results in three main parts (1) firm
characteristics, (2) location attributes, and (3) state regulations.
Firm Characteristics
We find that firm level characteristics such as employee training, firm age, share of skilled
workers, and technology adoption influence productivity. As noted previously, productivity
is measured as output per worker, which in fact represents labor productivity.
Employee Training: Using all firms in the ENESTYC sample, we find that employee-
training programs have a positive effect on labor productivity. The coefficient reported in
Table 1 is 0.268, which means that firms with employee training programs are 31% more
productive than other firms. Translating this into Pesos, an employee-training program
increases labor productivity by about 78,000 pesos per worker. The positive contribution of
employee training is significant even when we parse the sample into micro and other firms.
However the benefits of employee training are more pronounced for micro firms. The
coefficient for micro firms is 0.586 (Table 6), which translates into an 80% productivity
increase or 125,000 Pesos/worker. In comparison, the coefficient for other firms is 0.131,
which is about a 14 % increase in productivity or 40,000 pesos per worker. The benefits of
training are important, but to a lesser extent for non-micro enterprises.
Firm Age: The effects of firm age vary between micro and other firms. In general we find
that firm age has a positive effect on productivity. Using the entire ENESTYC sample, we
estimate the coefficient on Age as 0.004, which means that firms increase productivity by
16
about 0.37% or 930 Pesos/worker with each additional year in business. The coefficient for
non-micro firms is 0.006, which means that these firms increase productivity by 0.62% or
1,770 Pesos/worker for each additional year in business. In contrast, Age has a negative
effect on the productivity of micro enterprises. The coefficient for Age is -0.007, which
means that productivity of micro enterprises decreases by 0.66% or 1,040 Pesos/worker
every year.
Share of Skilled Workers: The skill level of workers influences productivity. The coefficient
for this variable for all firms is 0.005 which means that a 1-percent increase in the share of
skilled workers increases productivity by 0.5% or by 1,270 Pesos/worker. The benefits of
skilled labor are higher for non-micro firms with productivity estimated to increase by 1,630
Pesos/worker with a 1% increase in the share of skilled labor. In comparison, the benefits for
micro firms are estimated to be 400 Pesos/worker.
Technologv Adoption: Technology adoption is measured by three variables - adoption of
generic technologies, (2) adoption of automated equipment, and (3) adoption of CNC
technology. We find that technology adoption has a positive effect on productivity. The
coefficients for all three types of technology adoption variables are positive and significant
when we use the entire sample. For example, the coefficient for the use of any type of
generic technology is 0.378, which translates into a 46% or 117,000 Pesos/worker increase
in productivity. Similarly technology adoption increases productivity by 50% (79,000
Pesos/worker) for micro firms and about 21% (61,000 Pesos/worker) for other firns.
While the adoption of generic technologies has considerable benefits for all firms,
micro firms appear to benefit the most from adoption of CNC technologies. Using CNC
machines is estimated to increase micro firm productivity by 126.52% which is about
200,000 Pesos/worker. Of course, these results do not reflect the costs associated with
adopting these technologies and their utilization potential by micro enterprises.
Firm Size: Firm size increases productivity - larger firms are more productive than other
firms. Using the entire sample we find that small, medium and large firms are more
productive than micro firms, and the benefits of scale increase with firm size.
17
Source of Investment: Foreign investment matters. In general, we find that firms who have
majority investment from foreign sources are more productive than other firms. Using the
entire sample, we find that firms with majority foreign investment are about 40% more
productive than other firms. This translates into a productivity differential of about 100,000
Pesos/worker between firms with majority foreign investment and other firms in the sample.
As there are almost no micro firms in the sample that have substantial foreign investment,
findings here are only relevant to non-micro (mostly medium and large) firms. When we
remove micro firms from the sample, the estimate for other firms is 0.049, which means that
average productivity in firms with majority foreign investment is about 50% higher than
productivity for other non micro firms.
Location Attributes
Southern Location: To examine productivity differential between Southern and other firms,
we introduced a firm invariant fixed effect, which is 1 for firms in the South and 0 for firms
located in other parts of the country. The coefficient of -1.137 for all firms means that firms
in the South are in general about 68% less productive than firms located in other parts of
Mexico. However, the location disadvantage only applies for micro-firms. The coefficient of
- 1.90 for these firms means that micro firms in the South are about 85 % less productive
than other micro firns. On the other hand, the coefficient for firm location in the Southern
states is not significant for non-micro firms. This means that there are no significant
productivity differentials between non-micro firms in the South and other parts of the
country.
Market Access: One of our main questions of interest is to examine the importance of
market access as measured by the indicators described in Section 3. Since the two alternative
access indicators (potential market integration based on urban population and the amount of
GDP generated within a two hour travel time) yielded almost identical results. We therefore
only discuss the results using the former. This indicator provides an index measure of the
size of the potential market that can be reached from a particular point, conditional on the
density and quality of the transport network within that region. Using the entire ENESTYC
18
sample, we estimate the coefficient for the market access indicator to be 0.006. The
coefficient is statistically significant and suggests that a 10% increase in market access will
increase labor productivity by 6%. In productivity terms this means that, in general, a
percentage increase in market access will enhance productivity by 1,530 Pesos/worker.
The importance of domestic market access varies between micro and non-micro
firms. For micro firms, we find that market access is a significant determinant of labor
productivity. Our estimate of 0.01 means that a 10 % increase in access to markets will
enhance productivity by 13 %. This translates into a productivity gain of 1,630 Pesos/worker
with 1 percent increase in the market access indicator. On the other hand, market access is
not a significant determinant of productivity for non-micro firms. As in the case of Southern
location, we do not find evidence to support the importance of domestic market access for
non-micro firms in Mexico.
The estimates of the impact of improvements in market access mentioned here are
largely illustrative. A given percentage increase in market access cannot easily be translated
into a policy relevant variable such as a certain amount of required infrastructure investment
in Pesos. This is because the market access indicator is essentially "unit-less", and
infrastructure investment is location-specific and will have different effects in different
places. However, GIS techniques could be used to assess the potential effect of alternative
infrastructure projects on market access which can in turn be converted into an estimate of
productivity gain.
State Regulations
As discussed in section 3, we use (1) number of days to open a business and (2)
ranking of states by regulatory improvement programs. Both measures have the expected
impact on productivity. Using the entire sample, the coefficient for number of days to open a
business is -0.002, which means that each additional day added by bureaucratic red-tape
reduces productivity by 0.17 % or by 4,200 Pesos/worker. In comparison, firms located in
states who have made regulatory improvements are likely to perform better. Our analysis
19
suggests that a unit improvement in regulation or business climate will enhance productivity
by 0.8% or by 2,120 Pesos/worker.
We find that the state level business environment largely affects micro firms. The
coefficient for 'number of days' is -0.007 which means that a unit increase in the number of
days required to start a business decreases labor productivity by 0.67% or by 1,050
Pesos/worker among micro firms. The coefficient for state level regulatory improvements is
-0.012, which means that a unit improvement in state regulations will increase productivity
by -1.24% or by 1,950 Pesos/worker. In comparison, only the regulatory improvement
variable is significant for non micro firms. The coefficient of -0.005 means that a unit
improvement in the regulation ranking will improve productivity by 0.54%.
6. Conclusions
In this paper we examine the determinants of firm level productivity in Mexican
industry and their relation to differentials in economic performance in the Southern states of
Mexico in comparison with the rest of the country. Using firm level data from the National
Survey of Employment, Salaries, Technology, and Training (ENESTYC) we examine four
related hypotheses on economic structure and productivity.
The first hypothesis is that there are considerable productivity differences between
firms in the South and other firms. Using the ENESTYC data we find that average labor
productivity in the South is about 53% of the national average. Central to the findings of low
productivity is the dominance of micro enterprises in the economic base of the South. These
firms account for as much as 55% of all economic activity in the region, with average
productivity being much lower than firms of other size categories. Results from our
econometric analysis show that significant productivity differentials do not exist across all
size categories but are only limited to micro firms. Average labor productivity for micro
enterprises is 25,000 Pesos per worked in the South compared to 157,700 Pesos per worker
nationwide.
20
The second hypothesis is that the industrial structure of the South is. considerably
different from the rest of the country. We find evidence to support this hypothesis as over
two-thirds of Southern industrial activity is either in Food, Beverages, and Tobacco and in
Textiles, Clothing, and Leather industries. In contrast, these industries represent only 41% of
economic activities nationally. The main concern with this specialization is that average
labor productivity for these two industry sectors in the South is considerably lower than
national standards.
The third and fourth hypotheses relate to determinants of firm level productivity. Our
empirical analysis shows that labor force skill levels, employee training programs and
technology adoption have positive effects on firm level productivity. These findings support
predictions from the New Growth Theory where accumulation of knowledge capital is a
crucial factor for productivity growth, and the heterogeneity in its sources (i.e., worker skill,
investment for new technology, and trade) will create significant difference in firm
performnance, or collectively, regional performance. As the economic landscape of the South
is dominated by micro firms, it will be important to assess the relative costs associated with
various types of skill upgrading and technology adoption programs as well as link these to
absorption capacity at the firm level.
In addition to firm level characteristics, regional endowments and characteristics also
influence productivity. We find that access to markets has important productivity effects.
Given the low levels of transport connectivity in the Southem states, improvements in the
quality and density of the network are likely to enhance productivity. However, we find that
improved market access only matters for the micro enterprises and are not significant for
medium and large size firms. One explanation for this is that a considerable share of
medium and large size firms produce for foreign markets compared to most micro firms
which produce for the "local" domestic market. As our indicator of market access only
covers domestic markets, it is likely that the benefits of connectivity to trans-border markets
as in the United States are not captured in the analysis. However, these results must be
examined in a larger context. As most micro enterprises in the South with their low
21
productivity levels operate much below the domestic best practice efficiency frontier, any
improvements to the external environment must be accompanied by improvements at the
firm level. The benefits of infrastructure access can only be fully realized if the internal
allocation at the firm level is efficient and there is a reduction in internal X-inefficiency
(Leibenstein 1966). In this context, infrastructure improvements are a necessary but not
sufficient condition.
Beyond the impacts on firm level productivity, poor transport infrastructure
translates into escalating logistics costs for firms located in the Southern regions. Guasch
(2002) estimates logistics costs in Mexico's Southern States to be around 29% of GDP,
which is considerably higher than the national average of 18% which by itself is twice the
level of OECD countries. Transport and transshipment costs represent about one-third of
total logistics costs. The poor condition of the road networks is also affecting the efficiency
and the reliability of trucking services, by increasing truck operating costs by 10% to 30%
on deteriorated highways, and by affecting delivery schedules. While investments in inter
regional infrastructure and regulatory reform are necessary conditions for enhancing
productivity, they are definitely not sufficient. Recent work by Lall and Rodrigo (2001) on
Indian industry points to the existence of significant plant level technical inefficiencies,
which range from 50 - 60 percent of the domestic best practice standards. Productivity gains
from improvements in transport infrastructure will be limited without improvements in firm
level efficiency.
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Figure 3: Market Access Indicator Using Travel Times
Accessibility Index
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